U.S. officials confirm international sweep targeting Liberty Reserve

The U.S. Attorney’s Office in New York Tuesday confirmed the indictment and criminal action against Liberty Reserve, which the office called one of world’s largest digital currency companies. The office also said that seven of its principals and employees were included in the indictment.

According to the U.S. Attorney’s office, Liberty Reserve, which was based in Costa Rica, was a $6 billion money laundering scheme with at least a million users worldwide.

The action against the company and associated individuals involved law enforcement in 17 countries and is being considered by officials as the largest international money laundering prosecution in history.

The U.S. attorney, Preet Bharara, who is a federal prosecutor, said that there were about 200,000 Liberty Reserve users in the United States.

Nearly all the transactions were illegal and involved more than $6 billion in suspected proceeds of crimes including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking, said the U.S. Attorney’s Office.

In addition to Costa Rica, the investigation involved law enforcement action in 17 countries, including The Netherlands, Spain, Morocco, Sweden, Switzerland, Cyprus, Australia, China, Norway, Latvia, Luxembourg, the United Kingdom, Russia, Canada, as well as the United States.

One aspect of the crackdown became known Friday when a Costa Rican prosecutor, Jose Pablo González, said that Liberty Reserve administrator Arthur Budovsky, 39, a Costa Rican citizen, had been detained in Spain. He oversaw searches of the man’s property here and the confiscation of computer servers and three vehicles.

For some reason, federal officials did not announce the actions until today.

In addition to Budovsky, Vladimir Kats, 41, the co-founder of Liberty Reserve, was arrested in Brooklyn, New York; Azzeddine el Amine, 46, a manager of Liberty Reserve’s financial accounts, was arrested in Spain; and Mark Marmilev, 33, and Maxim Chukharev, 27, who helped design and maintain the firm’s technological infrastructure, were arrested, said the federal agency in a release.

Marmilev was arrested in Brooklyn, and Chukharev was detained in Costa Rica, the agency said. Two other defendants, Ahmed Yassine Abdelghani, 42, and Allan Esteban Hidalgo Jimenez, 28, are at large in Costa Rica, it added.

“As alleged, the only liberty that Liberty Reserve gave many of its users was the freedom to commit crimes,” said Bharara. “The coin of its realm was anonymity, and it became a popular hub for fraudsters, hackers, and traffickers. The global enforcement action we announce today is an important step towards reining in the Wild West of illicit Internet banking. As crime goes increasingly global, the long arm of the law has to get even longer, and in this case, it encircled the earth.”

The U.S. Attorney’s Office gave this background report in a news release:

Liberty reserve was incorporated in Costa Rica in 2006 and operated the digital currency commonly referred to as “LR.” While the company billed itself as the Internet’s largest payment processor and money transfer system, serving millions of people around the world, including the U.S., at no time did the company register with the U.S. Department of the Treasury as a money transmitting business, as required by law.

Budovsky, the principal founder of Liberty Reserve, directed and supervised its operations, finances, and corporate strategy. Kats, a co-founder, helped operate the company until 2009. The day-to-day operations were managed, at different times, by Hidalgo and Yassine. El Amine managed various financial accounts controlled by Liberty Reserve, while Marmilev and Chukharev were primarily responsible for designing and maintaining the company’s technological infrastructure.

The defendants created, structured, and operated Liberty Reserve as a criminal bank-payment processor designed to help users conduct illegal transactions anonymously and launder the proceeds of their crimes. It emerged as one of the principal money transfer agents used by cyber criminals around the world to distribute, store, and launder the proceeds of their illegal activity. The company grew into a financial hub of the cybercrime world, facilitating a broad range of online criminal activity, including credit card fraud, identity theft, investment fraud, computer hacking, child pornography, and narcotics trafficking. Liberty Reserve was used extensively for illegal purposes, functioning as the bank of choice for the criminal underworld because it provided an infrastructure that enabled cyber criminals around the world to conduct anonymous and untraceable financial transactions.

The defendants also protected the criminal infrastructure of Liberty Reserve by, among other things, lying to anti-money laundering authorities in Costa Rica and pretending to shut down Liberty Reserve after learning the company was being investigated by U.S. law enforcement. They then continued operating the business through a set of shell companies, and moved tens of millions of dollars through shell company accounts maintained in
Cyprus, Russia, China, Hong Kong, Morocco, Spain, Australia, and elsewhere.

In order to use LR currency, a user first had to open an account through the firm’s Web site and provide basic identifying information. Unlike traditional banks or legitimate online processors, Liberty Reserve did not require users to validate their identities. Users routinely established accounts under false names, including such blatantly criminal names as “Russia Hackers” and “Hacker Account.” As part of the investigation, a law enforcement agent opened and executed transactions through an undercover account at Liberty Reserve in the name of “Joe Bogus” and the address “123 Fake Main Street” in “Completely Made Up City, New York.”

Once an account was established, the user could conduct transactions with other users. In these transactions, the user could receive transfers of LR from other users’ accounts, and transfer LR from his or her own account to other users, including any “merchants” that accepted LR as payment. Liberty Reserve charged a 1 percent fee up to a maximum of $2.99, every time a user transferred LR to another user through the firm’s system. For an additional “privacy fee” of 75 cents per transaction, a user could hide his or her own account number when transferring funds, effectively making the transfer completely untraceable, even within Liberty Reserve’s already opaque system.

To add an additional layer of anonymity, the firm did not permit users to fund their accounts by transferring money to the company directly through a credit card transfer or other means. Users also could not withdraw funds from their accounts directly. Instead, users were required to make any deposits or withdrawals through the use of third-party exchangers, which enabled the company to avoid collecting any information about its users through banking transactions or other activity that would leave a centralized financial paper trail. Budovsky, Kats, and El Amine owned and operated certain exchanger services.

The Liberty Reserve Web site recommended a number of pre-approved exchangers, which tended to be unlicensed money transmitting businesses operating in countries without significant governmental money laundering oversight or regulation, such as in Malaysia, Russia, Nigeria, and Vietnam. The exchangers charged transaction fees for their services that were much higher than the fees charged by mainstream banks or payment processors for comparable money transfers.

To further enable the use of Liberty Reserve for criminal activity, its Web site offered a shopping cart interface that merchant Web sites could use to accept LR currency as a form of payment. The merchants who accepted LR currency were overwhelmingly criminal in nature. They included traffickers of stolen credit card data and personal identity information, peddlers of various types of online Ponzi and get-rich-quick schemes, computer hackers for hire, unregulated gambling enterprises, and underground drug-dealing Web sites.

In addition to being used to process payments for illegal goods and services online, Liberty Reserve was also used by cyber criminals to launder criminal proceeds and transfer funds among criminal associates. For example, Liberty Reserve was used by credit-card theft and computer-hacking rings operating in countries around the world, including Vietnam, Nigeria, Hong Kong, China, and the U.S., to distribute proceeds of these conspiracies among the members involved.

The defendants were well aware that Liberty Reserve functioned as an unlawful money-laundering enterprise. In an online chat between Kats and Yassine that was captured by law enforcement, Kats explicitly described Liberty Reserve’s activities as illegal and noted that everyone in USA such as the Department of Justice knows “LR is money laundering operation that hackers use.”

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